8th May 2020 - AUD gains traction ahead of non-farm payroll release

Good morning

OVERNIGHT DATA AND HEADLINES

Millions more Americans sought unemployment benefits last week, suggesting layoffs broadened from consumer-facing industries to other segments of the economy and could remain elevated even as many parts of the country start to reopen. The deepening economic crisis triggered by nationwide lockdowns to slow the spread of the novel coronavirus was underscored by other data on Thursday showing worker productivity fell at its fastest pace in more than four years in the first quarter amid the largest drop in hours since 2009. Initial jobless claims for state unemployment benefits totalled a seasonally adjusted 3.169 million for the week ended May 2. Data for the prior week was revised to show 7,000 more applications received than previously reported, taking the tally for that period to 3.846 million. Economists polled by Reuters had forecast 3.0 million claims for the latest week. It was the fifth straight weekly decrease in applications since the record 6.867 million in the week ended March 28. Florida accounted for about 40% of the decline in claims last week, which some economists attributed to difficulties processing applications. There were also big drops in filings in Georgia, Pennsylvania, Alabama, New York and Washington state. Still, the latest numbers lifted to about 33.5 million the number of people who have filed claims for unemployment benefits since March 21, equivalent to roughly one out of every five workers losing their job in just over a month.

The Labor Department said nonfarm productivity, which measures hourly output per worker, decreased at a 2.5% annualized rate in the first quarter. That was the largest decline since the fourth quarter of 2015 and followed a 1.2% pace of increase in the fourth quarter. Hours worked tumbled at a 3.8% rate last quarter, the sharpest decline since the third quarter of 2009. Hours worked increased at a 1.2% rate in the fourth quarter.

The Bank of England said Britain could be headed for its biggest economic slump in over 300 years due to the coronavirus lockdown and kept the door open on Thursday for more stimulus next month. The BoE kept its benchmark interest rate at an all-time low of 0.1% and left its target for bond-buying, most of it British government debt, at 645 billion pounds. Two of its nine policymakers - Michael Saunders and Jonathan Haskel - voted for a further 100 billion pounds of bond-buying firepower and Governor Andrew Bailey said the BoE was ready to act again. The BoE estimated an extra two weeks of lockdown would cost about 1.25% of GDP in the short term and raise unemployment by 0.75 percentage points, though the longer-term impact would be near zero.

German industry output plunged 9.2% in March, its fastest decline since current records began in 1991. The auto industry, which was Germany's biggest exporter and employed more than 800,000 people before the outbreak, contracted by 31.1% on the month. Expectations in a Reuters poll were for a 7.5% drop. A breakdown of the data showed that export-dependent manufacturing was most affected by the slump in demand, contracting by 11.6%, including a 16.5% drop in capital goods.

Strict quarantine measures slammed the brakes on the Philippines' two decades of uninterrupted growth in the first quarter, hurtling the economy towards a recession this year. Gross domestic product unexpectedly shrank 0.2% in January to March from the same period last year, the first decline since the fourth quarter of 1998. The contraction dashed forecasts for 3.1% growth and economists now believe GDP will see a steeper drop ahead as an extended lockdown in the capital takes a heavier toll on domestic demand.

China's exports unexpectedly rose in April for the first time this year as factories raced to make up for lost sales due to the coronavirus pandemic, but a big fall in imports signalled more trouble ahead as the global economy sinks into recession. Overseas shipments in April rose 3.5% from a year earlier, marking the first positive growth since December last year. That compared with a 15.7% drop forecast in a Reuters poll and a 6.6% plunge in March. Imports sank 14.2% from a year earlier, the biggest contraction since January 2016 and below market expectations of an 11.2% drop. They had fallen 0.9% the previous month.

Wall Street climbed following a clutch of upbeat earnings reports led by PayPal as investors looked past more weak jobs data caused by the coronavirus-induced economic downturn. Dow Jones rose 211.25 points, or 0.89%, to 23,875.89, the S&P 500 gained 32.77 points, or 1.15%, to 2,881.19 and the Nasdaq added 125.27 points, or 1.41%, to 8,979.66.

CURRENCIES

The USD fell from two-week highs, as investors booked profits on gains ahead of nonfarm payrolls report for April. The DXY index fell 0.3% from 100.46 to 99.82.

The USD pared gains against the JPY, and was last up 0.2% at 106.28 (from 106.65). It fell 0.1% against the Swiss franc to 0.9733.

EUR recovered to trade 0.32% higher at 1.0834, earlier dropping to a two-week low of 1.0767.

GBP also rose 0.3% at 1.2378 amid the Bank of England's decision to leave interest rates unchanged and hold off on more stimulus.

Stronger-than-expected Chinese export numbers Chinese yuan in the offshore market, last up 0.5% at 7.0927.

AUD traded up 1.4% to reach a 0.6507 session high (from 0.6440 open), while the CAD rose 1.2% to 1.3975.

NZD headed north, jumping 1.18% to trade a 0.6094 high.

AUDNZD traded between a 1.0660 / 1.0700 range, ending around 1.0670.

AUDEUR reached a 0.6020 high before selling off slightly lower at close at 0.5995.

TREASURIES

U.S. Treasury yields fell from three-week highs as investors adjusted to the prospect of an increase in longer-dated debt supply. A rally in shorter-dated debt also sent two-year yields to record lows, while federal funds futures began pricing in a negative U.S. interest rate environment for the first time, a place the Federal Reserve is determined not to go.

U.S. 10-year yields fell 8 basis points on the day to 0.6314%, after reaching 0.7430% on Wednesday, the highest since April 15 (10-year yields have held in a tight range between 0.543% and 0.785% since April).

Strong demand for short-dated debt sent 2-year yields to record lows of 0.1290% while fed fund futures began pricing for the possibility of negative rates in December.

Euro zone bond yields were mostly steady after a hefty sell-off a day earlier as issuance volumes and a German court ruling targeting an ECB bond purchase programme remained in focus.

Core 10-year euro zone bond yields were neutral, with Germany's benchmark at -0.55% and the French benchmark at -0.03%. Spanish 10-year yields were at 0.89%.

COMMODITIES

Gold jumped 2% after a string of weak economic data releases offshore - Spot gold was up 1.72 % to $1,714.68 per ounce, having earlier hit a one-week high of $1,719.59.

Iron ore and steel futures in China jumped, extending gains into the fourth straight session after Beijing pledged more stimulus to relieve tax burdens and boost credit support for companies. The most-traded iron ore futures on the Dalian Commodity Exchange closed up 2.0% to 623 yuan ($87.71) per tonne. Spot prices of iron ore with 62% iron content for delivery to China were unchanged from previous session at $84.5 per tonne.

Copper prices climbed for a fourth straight session as China reported a rise in imports for the metal and an unexpected jump in overall exports. Benchmark three-month LME copper touched a high of $5,295 a tonne, its highest since March 17. Zinc hit its highest in nearly five weeks +1.1% to $1,998 per tonne. LME aluminium rose 0.5% to $1,487 a tonne, lead was up 1% at $1,646, tin was steady at $15,210, while nickel was down at $12,185.

Oil prices slipped as global supply and demand worries erased earlier gains seen from an increase in Saudi Arabia's official crude selling price and a surprise rise in Chinese exports last month. Brent futures fell 26 cents, or 0.9%, to settle at $29.46 a barrel, while U.S. West Texas Intermediate (WTI) crude lost 44 cents, or 1.8%, to settle at $23.55. Earlier in the day, Brent was up over 5% and WTI up over 10%.

After briefly dipping below 0.6400, AUD once again found wings to rally up towards 0.6500 reaching a 0.6507 high. Stronger U.S. equities & overall commodity prices over came a weaker USD across the board & weaker U.S. treasuries as the U.S. weekly jobless claims painted yet another dismal outlook for the U.S. economy.

Yesterday’s trade data from China and Australia lifted key FX risk barometer AUD/JPY away from major supports and toward May and April highs, which in turn provided the much needed boost for AUD. The question is whether the trade data can continue to present continued improvement or just quirks of pandemic lockdowns. Potential U.S.-China trade talks next week could throw another wrench into the risk-on recovery, particularly with Chinese imports tumbling in April and U.S. demand for pandemic-related Chinese exports surging.

Locally we have no major economic releases however the RBA statement on Monetary policy will be released which will practically emphasis the RBA’s stance and commitment on ongoing economic support if and when needed.

Tonight’s focus will be on the much anticipated release of U.S. non farm payrolls. The jobless claims data from last night will have no impact on the employment report for April as it falls outside the period during which the government surveyed establishments and households for its monthly report. According to a Reuters survey of economists, non-farm payrolls are forecast to have plunged by a historic 22 million in April, which would blow away the record dive of 800,000 seen during the 2007-2009 recession. Employment dropped by 701,000 jobs in March, ending a record streak of gains dating to September 2010. The unemployment rate is seen jumping to 16% in April, which would shatter the post-World War Two record of 10.8% touched in November 1982. The jobless rate in March shot up 0.9 percentage point to 4.4%, the largest monthly change since January 1975.

For the AUD, opens this morning at 0.6495.

Key risk surrounds the non-farm payroll release tonight. Expectations are for a disastrous headline but its more around the reaction of U.S. equities which will have a follow on through to AUD.

May 5 daily high & 10 / 100 day moving averages are pierced which extended the rally through 0.6500 near 0.6510.

Daily techs lean bullish, pair above 10 & 21-DMA, RSI is rising. Key resistance sits near 0.6570 followed by 0.6670/0.6700Supports are found at 0.6480 followed by 0.6465, 0.6440.